Posted by: Josh Lehner | March 16, 2018

Retail and E-Commerce (Graph of the Week)

Happy Friday everybody! Two quick items of note and a Graph of the Week.

First, the U.S. Bureau of Economic Analysis just released a new report on the digital economy. BEA published a working paper I am still digging through, but as you would expect, the research finds the digital economy is growing significantly faster than the overall economy. They dive into the different components of the digital economy like digital-enabling infrastructure – computers, software, telecomm – in addition to e-commerce and digital media. The BEA has data to download on how the digital economy impacts different industries in the economy as well. Here is a bottom line summary from the paper:

From 2006 to 2016, BEA estimates that digital economy real value added grew at an average annual rate of 5.6 percent, outpacing the average annual rate of growth for the overall economy of 1.5 percent. In 2016, the digital economy was a notable contributor to the overall economy – it accounted for 6.5 percent of current-dollar GDP, 6.2 percent of current-dollar gross output, 3.9 percent of employment, and 6.7 percent of employee compensation.

Second, I had the fortune to be a part of a panel discussion and work group at the Urbanism Next conference last week in Portland. Urbanism Next is part of the Sustainable Cities Initiative and the University of Oregon. Their big focus is on how technology is changing cities and includes some fascinating research. Where I come into this discussion was one session that focused on the intersection of technology/automation and public sector finances. How do autonomous and electric vehicles, e-commerce, and yes, even the hard-to-define-yet-even-harder-to-see-in-the-data sharing economy impact both public sector revenues and expenditures. Getting to hear the thoughts and strategies from urban planners, developers, and transportation folks was enlightening and added depth to these issues in terms of how we economists think about them. CityLab’s Laura Bliss didn’t write about the session I was a part of, but she did write about the long-term outlook for suburban retail and some of the new research on this.

All of that brings us to this edition of the Graph of the Week. The key point I tried to make at the conference, and in other presentations is about the size and scope of the retail landscape. Yes, e-commerce type jobs are growing briskly — nearly 8 percent annually in recent years. However they remain considerably fewer in number than the classic brick and mortar retailers, let alone compared with all other retailers. In fact, those other retailers continue to add significantly more jobs in recent years. The retail apocalypse narrative is overdone, even with the Toys “R” Us announcement this week – it was less their sales and more their debt from a leveraged buyout a decade ago.

It is easy to fantasize about drone deliveries eliminating many retailers and simultaneously relieving traffic congestion, but the path from today to this yet unknown future is likely to be longer and more meandering than the conventional wisdom suggests, at least as I read it. I really try to avoid being Abe Simpson and the “old man yells at cloud” guy, but these technological changes and economic transformations are usually slower-moving but very profound forces over the long-run. This isn’t to suggest that we don’t have too much retail space. One big issue there is the type/size of retail space and its location. We’re certainly seeing some mismatches on those fronts that are likely to continue. Similarly our office expects retail employment in Oregon to continue to grow, due in large part to our population, but at considerably lower rates than those seen in the typical industry. Retail over the next five years will add jobs at less than half the rate of the economy overall. Wholesale and transportation, warehousing, and utilities will see somewhat better growth rates, however the components within that tied more directly to e-commerce should continue to see stronger gains.

Posted by: Josh Lehner | March 14, 2018

Labor and the Trades

In recent months, I have had numerous conversations and given presentations that focus on multifamily and nonresidential construction. This work includes the issue of finding workers for the trades in a tight labor market. Below are a few thoughts. All of the data is U.S. data in large part due to sample size concerns.

First, I want to define what I call classic blue collar occupations. We’re talking about occupational data here, based on what tasks and duties the workers actually perform, not industry data which mixes front line workers with back office staff. Classic blue collar occupations include four occupational groups: construction, installation, maintenance and repair, production, and transportation and material moving. Reminder that production jobs are, essentially, the manufacturing jobs that do the actual manufacturing. In the job polarization research all of these occupations are routine manual jobs, and are considered middle-wage jobs.

The most common issue our office hears is that it is hard to find workers. The labor market is getting tighter, due to both the strong economy and due to demographics as Baby Boomer retirements pick up. However, as I stress in these conversations and presentations, this demographic issue is widespread and impacting all industries and occupations. The trades, or the classic blue collar occupations are not facing worse demographics than other occupations. That does not mean, however, that it isn’t a problem and isn’t a challenge for businesses. The point is that the tight labor market impacts everyone. The good news, especially in places like Oregon with its migration trends, is that there are more warm bodies walking around today. The challenge is attracting them to come work for your firm.

Now, one issue the classic blue collar occupations do face is that fewer young adults are working in these jobs. The relative decline is seen among young women and among young men. The key question here is how much of this is a demand side problem — fewer jobs available — and how much is a supply side problem — fewer young adults willing to enter into these professions. I do not have a perfect answer here. However the patterns and timing of the declines point toward demand side issues being the primary driver. Jobs disappear in recessions and don’t come back, or at least not all the way, in expansions. This is particularly true for production jobs. That said, I don’t believe you can entirely ignore supply issues either. The combination of fewer vocational or career technical education classes in high schools and the increased focus on attending four year universities are likely acting as supply side constraints in terms of young adults knowing about and/or considering entering into these professions.

The decline seen above among young women is entirely about production jobs. The share of young women employed in the other three blue collar occupational groups combined has held steady in the 1-2% range over the past 40 years. As that percentage implies, and as you probably know, these blue collar occupations overall are dominated by men. Nationwide and across all ages, women are 3% of construction jobs, 4% of installation, maintenance and repair jobs, 17% of transportation and material moving jobs, and 29% of production jobs. As such, women clearly represent a largely untapped labor pool for businesses looking to hire and expand. (Another place the labor will come from will be young adults more broadly, as higher ed enrollments, particularly among two year programs, decline in a stronger economy.)

That said, I am focusing on just men — 85% of all blue collar workers today — in this final set of charts due to sample size concerns as I dig into the microdata. These charts show the share of men employed in each blue collar occupational group over their lifetime by birth cohort. So as you follow one line left to right, it tracks that birth cohort as they age into their 20s, their 30s, their 40s, and their 50s. Each separate line represents a different birth cohort. This allows you to see both lifecycle and generational effects or trends.

A few trends do stand out:

First, there has been a relative decline in employment across all blue collar occupations, but to somewhat varying degrees. The decline is particularly large for production jobs, seen in the lower left. There really are fewer production (manufacturing) jobs today, and you can see the decline over time among the younger and older cohorts.

Second, the Great Recession clearly impacts the 1990 cohort to a significant degree. There really were fewer job opportunities for this group when they entered into adulthood and even after college. This is particularly pronounced in construction jobs, seen in the upper left. There was no erosion among young men entering the field for the 1960, 1970, or 1980 cohorts. However in the aftermath of the housing bubble, there certainly was. Encouragingly, as the jobs have come back to the industry, so too have young workers. The employment share is rising quickly for both the 1990 and 1995 cohorts.

Third, there is considerably less erosion among installation, maintenance, and repair workers over time. In fact, recent cohorts are just a hair below previous generations. This is good news, because these jobs, along with construction (particularly the nonresidential) are the gold standard for career paths that do not require a four year degree. Both of these occupational groups are largely population driven and less prone to automation or offshoring. They are growing middle-wage career opportunities.

Fourth, the gap in transportation jobs for young workers is largely about laborers and packers. However the surge in employment among the 1995 cohort is closing that gap quickly, as it is largely contained to these specific occupations. I suspect, but cannot confirm, that these would e-commerce related jobs which have increased considerably in recent years. Still, there is a 1-2 percentage point gap when it comes to generational differences for truck drivers. This amounts to about 30,000 potential truck drivers at every single individual age. Of course, as has been documented plenty, truck driving is a grueling profession with long hours on the road, and, you know, the supposed pending doom of automation is looming.

Bottom Line: All industries and occupations are being impacted by the tight labor market and Baby Boomer retirements. However classic blue collar occupations really are seeing fewer young adults enter into their professions. This largely appears to be due to the fact that there have been fewer such jobs in recent decades. However we cannot entirely ignore supply issues, nor pools of untapped potential workers, like women. In a yet unwritten future post I want to highlight some of the programs in place in Oregon that work on career technical education and apprenticeships. Looking forward, I am optimistic about more young adults entering into the trades, particularly in the better-paying construction and installation, maintenance, and repair jobs which cannot be offshored nor as easily automated away. These remain growing fields of work.

Posted by: Josh Lehner | March 7, 2018

Update on Rural Housing Affordability

As our office documented a year ago, housing affordability truly is a statewide challenge. It is a major concern in our fast-growing urban areas, and throughout rural Oregon as well. In fact, rural Oregonian incomes are on par with rural American incomes, however home prices are 30 percent higher here and rents are 16 percent higher. These differences mean rural Oregon faces an affordability crunch. Pinpointing the exact reason for rural Oregon’s housing challenges can be difficult, however the data do tell a clear, or at least a consistent story.

First, rural Oregon has experienced faster population growth than the rest of rural America — 50% faster growth in the 1990s and twice as fast in the 2000s to date. This results in stronger demand for housing. Given that new construction is almost always more expensive compared to the older housing stock, a more modern mix of housing, or a larger share of newer homes can lead to higher prices when looking at the market overall. This does not appear to be the case in rural Oregon, however. There is not a larger share of homes built in the last decade or two. Housing prices in rural Oregon are more expensive than their national counterparts for all types of units and for all vintages in the housing stock.

As such, if a region experiences faster population growth but an average amount of new construction overall, that means the region is building less on a population-adjusted basis and the vacancy rate is falling. This is exactly the case in rural Oregon, where new construction since 2000 is approximately 30 percent less than in rural America on a population-adjusted basis. The result is rural Oregon’s vacancy rate is now nearly 2 percentage points lower than in rural America, while it was essentially the same back in 2000. Stronger demand coupled with limited supply is the classic recipe for rising prices. This is the story the data tells of rural Oregon’s housing crunch, when compared with rural America overall.

While these problems are more pronounced here in Oregon, unfortunately, they are not entirely unique. The lack of housing supply in Oregon’s urban areas, and in the other popular and fast-growing metropolitan regions of the country has eroded affordability everywhere. The lack of credit for single family developers and for land acquisition and development loans in particular appears to be a root issue impacting the supply. For more on the causes of the housing shortage, see our office’s previous report.

That said, some regions of rural American and rural Oregon face additional challenges in the form of vacation homes. Many ski resorts and coastal communities have housing markets based in large part on external demand rather than on local economic conditions. This places increased pressure on moderately priced homes, or so-called workforce housing. Along Oregon’s coast this issue is particularly pronounced. Both Lincoln and Tillamook counties have built an above average amount of housing in recent decades, at least relative to population growth. However after factoring in new developments targeted specifically as vacation homes, and an overall increase in vacation homes in general, the stock of workforce housing, or for local residents has barely increased. These pressures make affordability especially challenging for local residents. Furthermore, it also makes it difficult for local businesses to hire and retain workers, and results in longer commutes for individuals taking these jobs.

Finding a policy prescription to these issues is particularly challenging. I know some proposals suggest building more housing in, say, Otis and Toledo instead of Lincoln City and Newport. Additionally, Warrenton has historically absorbed some of Clatsop County’s growth whereas Astoria less so. However as The Daily Astorian detailed in their housing crunch series last year, Warrenton too faces housing affordability challenges in addition to political or societal objections to new construction. Obviously, more construction is needed everywhere to better align housing availability with demand if we hope to see better affordability moving forward. Our office’s baseline outlook does expect somewhat better market balance in the coming years with a continued pick-up in new construction coupled with slowing population growth. That said, expectations are not for a perfectly balanced market. That is unlikely to happen unless we see significantly stronger construction trends or a sizable reduction in demand which is unlikely to occur until the next recession. As such, affordability will remain a challenge in the near-term. Fortunately Oregon now has better household income gains that are helping with affordability via the denominator (income) rather than the numerator (housing costs).

Update: Here is a similar chart for new construction activity in the Gorge, by request.

Posted by: Josh Lehner | March 2, 2018

Oregon’s Generational Outlook (Graph of the Week)

Yesterday Pew announced they were changing their generational definitions to distinguish between where Millennials end and Post-Millennials begin, that name is still a work in progress. Specifically, Pew now defines Millennials as those born between 1981 and 1996, which makes them the same size, at least in terms of the number of years, as Gen X (1965-1980). Previously the definition for Millennials varied but was generally early 1980s through late 1990s. Our office had used 1981-2000. In their work, Pew highlights some of the defining features or life experiences for Millennials, including 9/11, the Afghanistan and Iraq wars, the 2008 election, and coming of age during the Great Recession and its lasting scars on housing, employment, and the like. Post-Millennials on the other hand were too young or not even born during these major events. However the one defining feature I latched on to for Post-Millennials was the smartphone. By the time every Post-Millennial reached middle school, smartphones were ubiquitous.

In the big picture these generational distinctions are not a big deal, given that societal and demographic changes are ever-evolving and slow-moving. Rarely is there a clear cutoff. That said, our office is updating our definitions as well in order to provide a more accurate comparison between state and national trends. This edition of the Graph of Week takes a look at the Oregon population forecast by these updated generations, coming from the state demographer, Kanhaiya Vaidya, in our office.

There’s a lot going on here, but the trends are clear. The reign of the Millennials has been pushed back to 2020 given the new, smaller generational definition, but they will still surpass the Baby Boomers. Pew estimates this will occur nationally in 2019. Not only are the younger generations still growing, in large due to migration, but we’ve hit the point where natural attrition is beginning to impact the Boomers. Oregon is still seeing net in-migration among Boomers, it’s just the increases in mortality are larger.

As mentioned previously, the growth seen in the Millennials, the Post-Millennials, and at the end of the forecast Gen AA* (or whatever they will be called) is all about migration. Oregon’s ability to attract young, working-age households is vital for our long-run economic growth. This is apparent throughout Oregon’s history — for example the Baby Boomers moved to Oregon in droves in the 1970s and again in the 1990s — and is built into our office’s baseline forecast.

* Given both Gen X and the Millennials now span 16 years, I pegged the Post-Millennials at 16 years as well. The generation that follows has no name that I’m aware of. I toyed with calling them The Last Gen, but figured that was too apocalyptic. I’m going with Gen AA given Post-Millennials are/were called Gen Z as well.

Bonus Graph of the Week:


Posted by: Josh Lehner | March 1, 2018

Behind the March Revenue Forecast

Since our office released the March 2018 economic and revenue forecast, we’ve been involved in numerous discussions about how exactly the forecast has evolved in recent months. In particular, how did the forecast go from seeing a hit to near-term revenues due to the impacts of the federal Tax Cuts and Jobs Act (TCJA) to actually showing higher total resources? What follows is an effort to clarify the underlying, and offsetting changes to the outlook.

It should be noted that there is a reduction in expected state revenues in 2017-19 from TCJA mostly due to the quirk in Oregon law related to repatriation, the bonus depreciation or expensing, and the 20% pass-through deduction. However, these declines have essentially been offset by four other forecast changes, as seen in the dark blue bar below. Year-end accounting, which includes unspent allocations from the previous biennium, increases total available resources via a larger beginning balance for the budget.

The four major forecast changes are as follows:

First, there are changes to other revenues beside personal and corporate taxes. The Lottery forecast has been raised, as have other General Fund revenues on net. Additionally there was a timing adjustment/shift made to better reflect when Rainy Day Fund transfers are actually made. In total these changes amount to approximately $40 million.

Second, the macroeconomic impacts of TCJA work to raise near-term revenues due to a somewhat stronger economy. As discussed in our report, and in our presentation to policymakers, this impact may not be huge for a variety of reasons, but it is still positive. More economic activity translates into higher tax collections, everything else being equal. However, tax cuts do not pay for themselves.

Third, behavioral changes on the part of taxpayers are likely to move the needle more than will economic feedback. The TCJA gives preference to certain taxpayers and activities while increasing the burden on others.  There will be a considerable amount of tax planning as taxpayers adjust to the provisions of the bill. Changes in the timing of tax payments are already evident, with changes in filing status expected to follow next year. Some workers and investors could choose to file as businesses.  Also, some businesses could benefit by changing from pass-through entities into C-Corporations, or the other way around.

One behavioral response that is assumed to have a large revenue impact is the secondary effect of multinational repatriation. After multinationals have brought their deferred income back home, and paid state and federal taxes on it, what will they do with it?  Will they continue to sit on it?  Reinvest it in the business here or abroad?  During the repatriation holiday in 2004, more than half of repatriated income was returned to individual shareholders. Although the size of the impact is uncertain, Oregon investors will be paid more taxable dividends and see more taxable capital gains from stock buybacks. While not much economic impact should be expected from this, it will raise personal income tax collections.

Fourth, the forecast is raised in large part due to tracking. Actual revenue collections have come in approximately $400 million higher than our previous outlook. The key question here is how much of this increase is due to a stronger economy and how much is due to taxpayer behavior and shifting the timing of payments to get ahead of federal changes. As seen below, once it became clear that TCJA would become law, estimated payments soared here in Oregon, and across the country as well. Our office expected some growth this year, however not $225 million in growth relative to last year. Withholdings show a similar pattern, albeit not quite as dramatic.

If this is simply a timing shift, then higher collections today will result in smaller final payments and larger refunds during this tax filing seasons and the next as well. The forecast would remain on track, but the timing of collections would be off. However, some of these increases likely reflect a better economy. As such our office has built in some stronger real gains as a result. In fact, our office’s concerns today are mostly upside risks to the near-term outlook.

Finally, when it comes to the timing shift and why or how much taxpayers changed behavior, Mark went so far as to call some of these changes the Lehner Theory. Now, I had to correct the record to explain the language used when discussing these trends, but our friends in the CFO office went ahead of created the image below to memorialize the discussion. Obviously, I think it sums up that part of the testimony properly.

Bottom Line: The Tax Cuts and Jobs Act does reduce Oregon’s near-term tax collections for a variety of reasons. However, due to other forecast changes, a stronger near-term economic outlook, larger dividend payments and stock buybacks, revenues tracking above expectations, and year-end accounting changes, Oregon’s General Fund resources are now expected to be modestly above our office’s previous forecast. Beyond this biennium, the outlook has largely been lowered somewhat. The structural budget gap of expenditures increasing faster than our office’s revenue forecasts remains in place.

Posted by: Josh Lehner | February 16, 2018

Oregon Economic and Revenue Forecast, March 2018

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The U.S. economy continues to perform well. Economic growth has picked up in recent quarters and job gains remain strong enough to pull down the unemployment rate even as more individuals are looking for a job. More importantly the near-term prospects for economic growth are good. The business cycle is not yet waning. The tight labor market drives wage growth higher. And as the economy approaches capacity, inflation is set to rise after five years running below target. From this relatively strong cyclical vantage point, the recently passed Tax Cut and Jobs Act by the federal government will boost near-term growth even further. However, longer-run forecasts remain relatively unchanged, in part due to the temporary and expiring provisions in the legislation.

In Oregon, the outlook remains bright as the economy continues to hit the sweet spot. Employment growth is more than enough to meet population gains and to absorb the workers coming back into the labor market. Wages are rising faster than in the typical state, as are household incomes. That said, employment and measures of economic wages have come in below expectations in the second half of 2017. From this somewhat lower starting point, the modest economic boosts provided by federal tax changes results in a relatively unchanged forecast overall.

Since the September 2017 forecast, two significant factors have come into play that have changed Oregon’s General Fund revenue outlook. The first factor, the new federal tax law (Tax Cuts and Jobs Act), stands to reduce state revenues in the near term, and will boost them in future budget periods. The second factor, a potential equity market correction, draws down revenues after a short delay.

Oregon’s tax collections are tied to federal tax law both directly and indirectly.  The starting point for calculating Oregon income tax is taxable income from a filer’s federal return. As a result, most federal changes to what is defined as income, or to what can be deducted or excluded from it, directly feed into Oregon tax collections.  The new 20% federal deduction for pass-through income will feed directly into lower Oregon taxable income, and reduce Oregon revenues.

Ignoring behavioral responses and other dynamic effects for now, static impact estimates suggest that Oregon’s General Fund revenues will be reduced by more than $200 million in the current biennium due to TCJA. This impact reverses during the next decade, increasing revenues by more than $200 million per biennium.  Several provisions contribute to this pattern, including accelerated depreciation (expensing), new inflation factors, expiring individual provisions and repatriated income from multinational corporations. Due to a quirk in current tax law, multinational repatriation represents a near-term revenue loss in Oregon rather than a windfall.

These static revenue impact estimates only tell part of the story, however, as households, firms and tax professionals are all certain to change their behavior in light of the new rules of the game.  Many of these behavioral responses, including the macroeconomic effects, will serve to mute the impact of TJCA on Oregon General Fund collections. While changes in the timing of tax payments are already evident, it will take some time before it becomes clear how many taxpayers will change their filing status in light of TJCA provisions.

Finally, Oregon’s General Fund is sensitive to equity prices, given our dependence on personal income taxes. The performance of equity markets feed into personal and corporate tax liability in many complex ways, but capital gains are the largest single piece. Although housing wealth is playing a larger role in driving taxable capital gains during the current business cycle than in the past, earnings and losses in stock markets account for the lion’s share of movements in taxable capital gains in the typical year.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | February 14, 2018

The Soft Bigotry of Low Economic Expectations (Graph of the Week)

Right now the U.S. economy is near full employment and operating at full capacity. The unemployment rate is low, and set to decline further as job growth continues to outpace labor force gains. Wages are rising, and inflation is picking up after five years of running below target. It is clear the business cycle has not yet waned. However, it is important to keep in mind that when economists talk about GDP being at potential – our office included – it really is a beaten down potential, or one of lower expectations today than a few years ago. Now, it makes some sense that potential GDP is lower today than before the financial crisis, which tends to leave scars and expose issues that take longer to heal. However, just how much lower potential GDP is today remains an open question that relies on estimates and methodological choices to answer. As you can see in this edition of the Graph of the Week, the U.S. economy today is just a bit above the Congressional Budget Office’s most recent estimate of potential GDP. However it remains four percent below their 2014 estimates and eleven percent below their 2007 estimates.

Now, the economy may truly be at capacity and will continue to run into supply side constraints, possibly sooner than expected. However, it may also be further from full employment or potential GDP than is commonly believed. This is why some economists believe that current federal fiscal policy — the combination of tax cuts and spending increases — has relatively limited risks. Or at least risks that skew toward the upside, rather than the downside. As such, to the extent that this fiscal experiment of providing stimulus into a relatively strong economy can wring out those last few percentage points of prime-age employment, or increase business investment and raise potential GDP further, then it is worth taking the opportunity to try. Full employment and a tight labor market do work wonders, even if they cannot cure all ills.

That said, while all of the major studies of the Tax Cut and Jobs Act find the legislation to be stimulative, the impacts on economic growth are very much on the margin. This is in part due to the nature of the legislation, which permanently reduces corporate taxes and provides temporary personal income tax reductions that skew toward high-income households, and in part due to the strength of the business cycle. In a strong economy, government stimulus is more likely to crowd-out private investment and activity than in a weak economy. Furthermore, some of the tax windfall for both individuals and corporations will be saved and not spent or invested in growth enhancing endeavors. You get less bang for your buck due the cyclical strength, and due to the design of the cuts.

Our office will have more on the impacts of tax reform on the economy and state revenues on Friday when we release our next quarterly forecast.

Posted by: Josh Lehner | February 8, 2018

Marijuana: Falling Prices and Retailer Saturation?

Recreational marijuana prices are falling and, in much of the state, retail options are plentiful. It appears to be a cannabis consumer’s dream, or at least what voters hoped for back in 2014 when Measure 91 was passed. Now, it has not been an entirely smooth ride to date, and concerns remain. Chief among them, as the new Secretary of State audit spells out, would be enforcement and ensuring products are tracked and accounted for. Additionally, potential saturation issues for growers, processors, and retailers indicate that some industry shakeout, or market consolidation is likely.

First, marijuana prices are continuing to decline. This is true here in Oregon, and in Colorado and Washington. Much of this is to be expected as businesses become more experienced in the newly legalized industry, which allows for efficiency gains. Furthermore, increased competition can lead to lower prices as well. Now, given Oregon levies the marijuana tax based on price, our office lists price as a risk to the outlook. Lower prices, everything else equal, would lead to lower revenues. However, lower prices should also lead to larger consumption. Demand curves do slope down. Further complicating the marijuana industry is the ongoing presence of the black market, which also competes on price, and can undercut the legal market at least in part due to the lack of regulations, product testing, etc.

While lower prices are a clear boon for consumers, they can lead to problems for some businesses. This is particularly true for those unable to adjust due to their business model, fixed costs, debt loads, and the like. For example, a firm may be profitable at a certain price point, however marijuana prices are falling by 10-20% per year. If that firm is unable to lower its operating expenses enough, accept lower profit margins, etc. then it can be in financial trouble. Grumblings within the industry suggest this is happening, at least in part due to market saturation. Now, is it truly a concern from an industry wide perspective, or from a consumer’s point of view? Unlikely. However, for any particular business it can be devastating.

This second chart tries to frame recreational marijuana market saturation here in Oregon relative to Colorado and Washington. In all three states, the number of recreational marijuana retailers is about the same, or just over 500. However, once you adjust the numbers based on population, it is clear that Oregon has significantly more stores. This does not necessarily mean Oregon is over-stored. It may be, but it may also be the case that the other states are under-stored. In fact, Colorado currently supports more marijuana stores overall due to their robust medical marijuana market. The error bars in the chart are an effort to show both the total number of marijuana storefronts (recreational + medical), in addition to just the recreational stores.

Now, there are an additional 140 or so retailer applications in the OLCC system. Should these stores open, it would push Oregon significantly past Colorado, even on a population adjusted basis. What all of this does mean is there is more competition for every Oregon recreational marijuana dollar, and this will likely increase. As such, average sales per retailer in Oregon are lower, leading to the industry shakeout or market consolidation concerns or expectations. Pete Danko had a good article in the Portland Business Journal recently about this.

As economist Beau Whitney notes, it’s easy to envision a long-run outcome for marijuana that is similar to the beer industry. One segment of the market is mass-produced and lower priced products. This will be the end result of the commodification of marijuana. Margins will be low, but due to scale, businesses remain viable. These are more likely to be outdoor grow operations as well, due to costs. Even in a world of legalized marijuana nationwide, it is plausible that Oregon, along with California, would remain a national leader in this market due to agricultural and growing conditions in the Emerald Triangle.

The second segment of the marijuana market would be similar to craft beer today. This segment would include smaller grow operations of specialty strains, higher value-added products like oils, creams and edibles. Such products will require and command higher prices. However, as our office has noted previously, it is here among the value-added manufacturing processes, in addition to building up the broader cluster of suppliers, and ancillary industries that Oregon will see the real economic impact of recreational marijuana. If all we have are growers and retailers, there will not be a large impact. Furthermore, the long-term potential of exporting Oregon products and business know-how to the rest of the country remains large.

Even if this market bifurcation materializes, it does not mean it will be an entirely smooth transformation. Conditions today are great for consumers, but potentially worrisome for some businesses. It will be interesting to watch how the market and industry continues to evolve. Our office’s forecast expects sales to continue to increase due to both new customers as usage increases and social acceptance of marijuana rises over time, and due to black market conversion. It’s the latter that is the most worrisome from a long-run perspective of industry viability. This is why enforcement and compliance are key issues being addressed by policymakers and industry professionals today.

Posted by: Josh Lehner | February 6, 2018

Reminder: Economic Data Still Healthy

It’s amazing what a little bit of stock market turbulence can do. I mean that in a bad way. As of this writing, both the S&P 500 and the Dow Jones Industrial Average are down around 7% from their recent highs, which brings them back to their… early December 2017 values. While financial markets are worth keeping an eye on, daily fluctuations are not. This is particularly true when there has been no real event or data release to reasonably justify such fluctuations. I like this Tim Duy chart that helps put the current market in context with past cycles. The key point is that equity markets continue to increase even during a Fed tightening cycle (rising interest rates). The current market looks to have accelerated some in recent months, relative to these past cycles, and then seen a moderate correction.

The bigger point here is that the economic data flow continues to be healthy. The charts below show the four main indicators that the National Bureau of Economic Research (NBER) uses to date U.S. business cycles. As of the latest available data, the U.S. is clearly not in a recession yet. Furthermore, if somehow it were in recession, it would take massive data revisions to reveal that the top of the cycle was December or January.

Now, even as expansions don’t die of old age, we know another recession will come eventually. It may even be sooner than many people think. However, as of now the economy is still expanding, and all of the leading indicators are flashing green. That said, the U.S. economy is entering into a different phase of the business cycle. It is or will soon be running up against supply side constraints, which will impact net growth rates moving forward. After a few years of autopilot, the macroeconomic outlook is interesting again. And I largely mean that in a bad way too. It’s not particularly concerning today, just a bit of nervousness as we try to gauge when the economy moves beyond a mature cycle and into the late stages of the business cycle.

Posted by: Josh Lehner | February 2, 2018

Oregon Leading Indicators and the Manufacturing Outlook

When it comes to leading economic indicators they tend to fall into two camps: manufacturing and related measures, and then everything else. Here in Oregon we have two composite leading indicators series, one from our office and one from Tim Duy at the University of Oregon. Broadly speaking, each of these series is about 50-50 in terms goods-producing indicators, and broader economic measures. So when the oil bust and industrial production declines that began in late 2014 hit the data, there was certainly a scare, and a risk to the near-term economic outlook. The U.S. had never seen industrial production declines like that during an economic expansion. We have only seen declines like that during the middle of recessions. The fear was a goods-producing decline could pull the rest of the economy down with it, even as the rest of the indicators continued to flash green. Well, those fears have clearly faded into the rear view mirror. Not only has the manufacturing and goods-producing cycle revived, the near-term outlook continues to look very good.

First, let’s talk leading indicators. Note that the data that our office and Tim uses is a mix of Oregon and U.S. figures given data availability. That said, none of the individual indicators are flashing warning signs today. This is one reason why the near-term economic outlook remains bright. The consensus of forecasters pegs the probability of recession over the next year at just 13% based on the latest Wall Street Journal survey. As I’ve been saying in presentations lately, even if some of these numbers began to turn down tomorrow, it would take awhile before everything devolved into a full blown recession. The data flow is clearly healthy.

In terms of recent performance, we don’t have a lot of Oregon specific manufacturing numbers, outside of employment and wages. So one thing our office looks at is the mix of local industries relative to the U.S. Over the past couple of generations, Oregon’s more modern mix of manufacturing (more aerospace, metals, and semiconductors, less auto parts and textiles) has served us very well. This largely continues to to be the case today as seen in the chart below. The red Oregon lines takes the U.S. industrial production numbers by sectors and re-weights them based on local employment numbers. Over the past year, the Oregon mix of industries has seen better growth than the national mix. This, of course, represents the pulling out of the goods-producing malaise following the oil bust and manufacturing slowdown back in 2015.

Right now the outlook is positive based on stronger domestic demand as the U.S. expansion continues, but also due to a better global economy as well. The International Monetary Fund just recently revised up their estimates for global GDP growth in 2017 and their outlook for 2018 and 2019. Left off the chart are emerging markets, which are growing faster (near 5%) but did not see a upward revision to the outlook.Additionally, the dollar has stopped appreciating, meaning Oregon-made and U.S.-made goods are becoming a bit less expensive to foreign buyers. This should help boost exports and goods-producing industries as well. Note that exchanges rates with Pacific Rim countries – where Oregon trades – aren’t showing quite the same depreciation trends as with the euro which is pulling the U.S. measure down recently.

Putting all of this together shows that the Oregon manufacturing outlook remains positive. Employment has picked back up in the past year and our office’s forecast expects these gains to continue. As noted in the chart below, Oregon’s manufacturing employment today is actually pretty similar to where it stood coming out of the last severe recession in the state – the early 1980s.

Older Posts »